Luma launches a new card that builds your credit rating and earns you cashback - so what's the catch?

Decent cashback credit card deals are disappearing from the market at an alarming rate, but Luma is bucking the trend with its new credit building card, which also helps shoppers to claw back 4 per cent on petrol and grocery spending.

This is good news for those with weak or poor credit ratings that want to improve their finances. But is it a deal worth signing up to?

Cashback: Filling up the car and doing your weekly shop could earn you money with a Luma credit card

What does the Luma card offer?

Usually attractive cashback or rewards schemes are reserved for those with the strongest credit history.

WHAT IS A CREDIT-BUILDER CARD?

For those who have a poor or limited
credit history it can sometimes be hard to get approved for a
new credit card.

You may
have a bad or low credit rating if you have paid your bills late,
received County Court Judgements, or even just from not being registered
on the electoral roll.

Your job may also have an impact, if you are self-employed, you work part-time or you are on a low income.

However, there are cards available that can help you to
build your rating - known as credit builder cards.

James Jones, a credit expert at Experian says: 'Credit builder credit cards can be a great way to counter a poor rating. It simply
gives you the opportunity to build up some positive history on your
credit report, whereas you might be refused other more mainstream cards
and therefore be denied the opportunity.'

Some providers will also specify that they report frequently to the big credit referencing agencies, meaning you will quickly start benefiting from the new information on your file.

Repeated rejections by lenders will affect your credit rating further, so opting for a credit-building card straight
off can be a sensible idea, to help you get back on track.

This
is because these deals are so popular that card providers
have the pick of the bunch when it comes to accepting applications.

But
the Luma card,owned by card provider Capital One,is marketed at consumers with a weaker credit
history who would usually be rejected for a mainstream cashback card.

It pays back a decent rate of 4 per cent on your grocery and petrol spends. And, for a card aimed at those working on their credit rating, a fairly standard £1,500 credit limit and 35.9 per cent interest rate.

How much can you earn?

According
to the provider, the average household in the UK will hand over a
whopping £1,893 each year at the fuel pump.

If you were to pay for this with the Luma card it would earn you £75.71 in cashback.

On top of that, it claims the average food bill totals £219.20
each month, which means you could earn £8.77 each month - or £105.24 a year if you were to pay with the card.

Using these calculations, the average family would earn around £180 a year on the card.

Except, unfortunately they can't.

Before you get carried away thinking of all the extra money you could earn, Luma has capped potential earnings at £108 each year.

How does it compare to other credit builder cards?

The Luma card is one of the only credit builder cards offering an extra perk, but don't jump straight in without checking out what else is out there.

The Barclaycard Platinum Balance Transfer Card is the best option for those looking to transfer over debts to a credit building card, offering 18 months interest-free on balance transfers and 0 per cent interest on purchases for three months.

This card also offers the lowest interest rate for those with a less than polished credit rating, at 24.9 (APR) per cent (after the conclusion of
its interest-free period), closely followed by the Aqua Classic Card at 29.7 (APR) per
cent.

If your top priority is cashback, The Capital One Classic Extra Card might also be worth a look.

It pays you 0.5 per cent on all spending. This means that using an average £500 on the card each month would earn you £30 a year - with an annual £10 bonus if you make repayments on time.

It is likely to earn you less than the Luma card, depending on how much you spend each month, but it comes with no caps on the amount you can earn, and pays cashback on all of your spending, not just fuel and groceries.

The Capital One card charges 34.9 per cent interest and has a maximum limit of £1,500.

WHAT ABOUT OTHER CASHBACK CREDIT CARDS?

Even for those with a decent credit
history, the number of attractive cashback deals are dwindling. However,
if you know where to look, there are still a few good offers to be
found.

American Express
offers the highest cashback rate, paying 5 per cent for the first three
months, capped at £125, and 1.25 per cent on everything else after
that.

Unfortunately, Amex cards are not always widely accepted, so you might be better off with the Santander 123 card, which pays one per cent on supermarket
spends, two per cent at major department stores and three per cent on
fuel, National Rail and TFL travel (£300 a month cap).

But,
remember, as these are all popular cards, you are likely to find that
your application is not accepted if you have a poor credit rating.

The small print

The Luma card charges interest at a whopping 35.9 per cent – this is much higher than a mainstream card, but fairly standard for a credit building card

Don't forget, providers are only obliged to offer the
headline rate to 51 per cent of applicants, so you may well end up with a higher interest rate than advertised, and possibly a substantially lower credit limit, too.

Although interest will not
affect you if you pay off your balance in full every month, it is still worth
hunting around for the lowest offer if you can.

If you have no credit history in the UK or you have been declared bankrupt in the past 12 months, Luma says you are less likely to be accepted for the card, so you might be best avoiding applying for it altogether to side step a further mark on your file.

This is Money verdict

It is good news for the many people out there with less-than-perfect credit ratings that new, attractive offers are appearing on credit builder cards.

The new Luma card does offer an appealing deal, but if you have a weak credit history it is important to remember that your first priority should be to find a card to help you improve your situation, rather than looking for attractive perks.

For example, you might be better off selecting a card with a lower interest rate, or one that drops your rate the longer you hold onto the card, such as the Barclaycard Initial credit card.

Remember, cashback and rewards cards are designed to encourage you to spend, and if you do not clear your entire balance each month on the Luma card you will end up with an eye-wateringly large interest bill.

You do not need to have a poor credit rating to apply for the Luma card, and with regular cashback offers shrinking, some people might be tempted.

But remember it does come with a low credit limit and interest charges at least 10 per cent above those charged on standard cards. So any cashback benefits will be quickly wiped out should you miss a payment.

WILL I BE ACCEPTED?

Although the entry criteria for a credit-building card is much lower than a standard card, it is important not to presume that you will be automatically accepted for the card.

As with a mainstream card, each provider will have a different set of guidelines when it comes to deciding whether you are a safe bet to lend to.

Some providers will list a set of conditions that make you more likely to be approved, so you should check these out when researching which card to apply for, as it can help prevent you being rejected.

Some
cards come with a condition on the maximum amount of CCJs you can have
or specifying that you must not have been declared bankrupt in the
previous 12 months, or you must earn above a certain amount.

All applications leave a shadow on your credit file, which can make it harder in future to be accepted for credit.

According to Experian this can last for several months so it
is best to space out your applications if you have been recently
rejected and are looking to apply for a credit building card.

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